No money? No problem. Startups are adopting the 'lean' philosophy to launch their businesses

Credit: Ralph Barrera

Credit: Ralph Barrera

Startups find they can get going quickly and with little up-front cost or overhead.

Working in the conservative finance industry, Annie Shafran learned first-hand that women don't have a lot of options for business-appropriate clothing. "It's Banana Republic or Ann Taylor," she said, or department stores, which don't easily categorize clothes by work versus personal attire.

She wanted to start her own e-commerce company that sold clothes tailored to women in conservative-dressing industries, such as law or finance, where jeans are out and suit jackets are in.

Her first step? Reading a book called "The Lean Startup" by Eric Ries.

Following the advice espoused in this book, which favors getting your product into the marketplace as quickly as possible while spending little money, 25-year-old Shafran was able to go from idea to full-fledged business in six months. Austin-based Bellgray launched in mid May.

All together, starting her company cost less than $20,000 and her monthly recurring expenses are $160, Shafran said. She has no employees, no inventory, and didn't seek any outside investment.

Shafran is one of a growing number of Austin tech entrepreneurs embracing the philosophy of lean startups.

Rather than spending months or even years perfecting a product and trying to sell it to investors, lean startup founders focus on releasing a product as soon as possible. "The idea is to try to invest as little as possible before you launch and then learn your lessons before you raise any money," Shafran said.

Leaning in

According to Ries, one of the leading evangelists for lean startups, entrepreneurs can build more viable, more sustainable companies by using faster, more efficient methods.

The approach stresses getting customer feedback at every turn, and letting users guide the development of the product so that it is constantly evolving based on their demands. It also embraces the idea of using tools for sales, marketing and development that are free or cost very little.

With venture capital becoming harder to come by -- investments in startups fell 11 percent nationally in the first quarter from the previous year --  experts say more entrepreneurs will turn to the lean startup philosophy to get off the ground. It also could mean working a full-time or part-time job while building a startup, rather than living off money given by investors.

"The next breed of entrepreneurs really understands that the biggest mistake you can make is building something that no one wants," said Ash Maruya, who has written books about lean startups and founded the Austin chapter of Lean Startup Circle, which meets monthly at Capital Factory, an Austin startup incubator.

"It's not about having an idea and hitting the pitching circuit," Maruya said. "The first step is launching it and finding some early customers who want it. Then you show it to investors."

The business 'mostly paid for itself'

In Austin, there's no shortage of startups that are adopting the lean approach.

Joshua Baer, founder of Capital Factory, said about 80 percent of the startups that rent space in his incubator would be classified as a lean startup.

Jared King, 24, embodies the lean startup philosophy.

King developed a prototype of an invoice form for freelancers or businesses to use when billing clients. He started to get some feedback on how to improve it and to his surprise, businesses started using it.

"It got to the point where people were like 'Hey, I would pay you money if I could do more," King said.

Credit: Ralph Barrera

Credit: Ralph Barrera

King is now running Invoiced with co-founder Parag Patel out of a small Austin office off Southwest Parkway. Invoiced helps businesses develop and manage invoices, subscription billing and online payment systems. "You don't have to write code or get an accountant" to use Invoiced, King said.

He said the business has "mostly paid for itself," with total startup spending less than $10,000. King said he is able to be truly "lean" because he's running a cloud-based software company.

His only expenses are office rent, salaries, web hosting and servers.

"Since we do all the product development in-house it saves a lot," King said. Invoiced now has more than 1,200 paying customers, including the NBA's Oklahoma City Thunder.

"We're approaching $20,000 in monthly recurring revenue," King said.

Baer said that lean startup concept is made possible by recent technological advances. The cost to create a tech startup has dropped in the past two decades from $5 million to $50,000, Baer said.

That $5 million used to be spent on hardware, such as computers servers, and software, as well as marketing and salaries, Baer said. "Now all those things you used to spend a million dollars on you literally get for free," Baer said. For instance, the emergence of cloud computing has rendered expensive hardware purchases unnecessary and marketing can be done with social media.

From the investor perspective, Baer said, working with startups that already have working prototypes and clients reduces the risk of investment.

"A lot of times, you are expected to bring a minimum viable product," to a investor, he said.

Customers first, development last

Build last is the approach that Tony  Aguilar took with his Austin startup.

After graduating from Indiana University  with $100,000 in student loan debt in 2007, Aguilar became a financial adviser and counseled others who were struggling with student debt.

Convinced there had to be a better way to cope with debt payments, he co-founded Student Loan Genius three years ago.

At first, the business functioned more like a consulting firm, with Aguilar and his team meeting face-to-face with workers wanting to address their student loans.

"We went to companies with no product to offer," Aguilar said. "We spent hundreds of hours sitting down one-on-one with their employees, talking about their student loan situations. Through that process, we figured out what a platform to help people with college debt would look like."

Even when companies began hiring Student Loan Genius to consult with their workers about student loan payment plans, the startup refrained from writing software.

Credit: Marlon M. Sorto

Credit: Marlon M. Sorto

"We started with a manual process, with invoices and writing checks," Aguilar said.

After spending enough time listening to customers, they began building software to automate the process in 2013. "At that point, we knew exactly what it needed to do," Aguilar said. "If we had jumped into development right away, we would have gotten it wrong."

Initially, Aguilar and his co-founders invested only a couple hundred dollars, and the platform started as a series of spreadsheets and presentations. The scrappy tools were enough to allow the company to raise $75,000 from angel investors in four months.

As they made progress, they were able to raise more money, bringing in $500,000 by the end of 2014.

The company has continued to take the lean approach to every aspect of its business, including sales, marketing and even hiring.

"We're always asking what are the things we can do on a small budget? What's free?' " Aguilar said. "We could make a big investment in marketing automation software. But instead, we use Word Press and we blog, which doesn't cost anything."

The strategy has paid off. Today more than four dozen customers use Student Loan Genius, which lets companies create matching programs that help their employees pay off their student loans faster. 

This year, the company completed a $3.1 million round of funding from investors including Gibraltar Ventures and Capital Factory.

Tapping into existing tools

The lean approach can even help people with non-tech backgrounds launch a tech startup.

Shafran, who still works in finance for UBS Financial Services while running Bellgray, said she found ways to accomplish the tech side of her business while also saving money.

Instead of hiring a web developer to build a site from scratch, Shafran used an existing template from Shopify and hired a developer to help her customize it.

She interviewed 30 developers before she settled on someone who would not just build the site, but teach Shafran some basic coding skills so she could run it herself.

"A lot of people have web developers that do it for them but I'm doing (the coding) myself in the spirit of a lean startup," Shafran said. Shopify also provides transaction processing.

Shafran also found a way to populate her site with clothes without ever having to talk to a single retailer or handle inventory. She uses a company called Varinode, which offers turnkey e-commerce software.

Using this software, Shafran selects clothes to display on her site from department stores, with well-known brands such as Diane von Furstenberg, Theory and Tory Burch.

She makes money by taking a 5 percent cut of each transaction.

She also paid a retail strategist to help her on the fashion side. That turned out to be a smart move - it was that strategist who first recommended the book "The Lean Startup."